Even though the ‘grant of license’ clause is the primary operative clause of the licensing agreement, it is often not given due consideration in contract negotiations.
Standard license qualifiers found in this clause include exclusive vs. non-exclusive use, the field of use, the territory and the precise activities that are permitted under the license. Other qualifiers such as “irrevocable”, “perpetual”, “sublicensable”, etc., are sometimes included and sometimes dealt with solely in separate clauses of the agreement. Either way, it behooves the parties not to simply rely on any licensing agreement template and to pay attention to the structure and content of this clause in the framework of the circumstances of a given transaction.
From the perspective of a licensee, a fundamental mistake in this clause—even when dealing with intellectual property that is not yet in existence—is to fail to include present tense language. While language such as “licensor hereby agrees to grant…” or “licensor shall grant…” seems to continue to find its way into agreements, such language potentially jeopardizes the licensee’s rights at inception by creating ambiguity as to whether the license might only be granted at some future date rather than under the licensing agreement itself.
In Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc. (2011), an important US decision on several fronts for the university technology transfer community, failure to be careful about this language came back to haunt Stanford University. Dr. Mark Holodniy was a research fellow at Stanford when he contributed to a groundbreaking polymerase chain reaction technique patent (relating to replication of DNA). He had signed Stanford’s standard copyright and patent assignment agreement, which provided that he ‘agree[d] to assign’ to Stanford his ‘right, title, and interest in’ inventions arrived at while conducting research at Stanford. However, in the US Appeals Court decision (upheld by the US Supreme Court), it was determined that ‘agree to assign’ is not the same thing as ‘assign’ – ‘agree to assign’ implies a future option to receive assignment, not automatic assignment. It is a matter of debate whether this drafting point is what ultimately decided Stanford v. Roche in favor of Roche; however, is it worth taking a chance on this point? The attorneys for several prestigious US universities didn’t think so: They amended their template agreements after the decision.
From the licensor’s perspective, it is in its interest to—as much as possible—condition the grant of the license on the fulfillment by the licensee of certain license terms. This aims to help the licensor in enforcing the license, allowing it to claim IP infringement under applicable law if the provisional terms are not fulfilled, rather than limiting its recourse to contractual claims, such as for damages or the right to terminate the license.
It should be noted, however, that a court will not consider every old licensing agreement term as a provisional license term just because the word “provided” or “subject to” is used. For example, it is far from clear that language such as “subject to the terms and conditions of the agreement, Licensor hereby grants…” will be of much help to a licensor on this front. Most terms of a license agreement will ultimately be considered simple contractual covenants, terms which, if not kept, might entitle a party to terminate for breach but will not give the licensor the right to claim infringement.
For terms closely related to the rights granted under the license and which are important enough to the licensor, it might make sense to expressly state these as conditions to the license in the grant of license clause. A good example of the sort of condition which may be included is discussed in Jacobsen v. Katzer, a landmark 2008 decision by the US Federal Circuit relating to open source licenses that overturned the US District Court decision. There, the Court found that a restriction against modification and distribution of copyrighted materials without the required copyright notices was a valid condition of an open source license, rather than a mere contractual covenant.
Other potentially valid license conditions include restrictions against reverse engineering or distribution outside of a given territory, violations of the number of users who may concurrently access licensed software, etc. It however remains to be seen whether a court would rule that a licensee could lose its license rights (i.e., prior to termination of the license agreement) by failing to pay royalties, even if this is expressly framed as a condition in the grant of license clause.
The topic of the upcoming instalment – The Royalty Base: Deductions in the Net Sales Definition
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